Step-Up Basis Impact Calculator
When you die with an appreciated asset, your heirs inherit it at fair market value — wiping out all capital gains from your lifetime. When you gift it while alive, they inherit your original cost basis — and owe capital gains on every dollar of appreciation when they sell. This calculator quantifies the trade-off: what does losing the step-up in basis cost your heirs, and when does gifting (removing the asset from your estate) save more in estate tax than you lose from forfeiting step-up?
What is step-up in basis?
Under IRC § 1014, when an heir inherits an asset, their cost basis is reset to the fair market value on the date of death — not what you originally paid. This "step-up" eliminates all capital gains that built up during your lifetime.
Example: You bought a business for $500,000 forty years ago. It's now worth $12M. You die holding it. Your heirs inherit it with a $12M stepped-up basis. When they sell it for $12M tomorrow, they owe $0 in capital gains — not the $2.7M+ they'd owe on $11.5M of appreciation.
When does gifting still make sense?
Losing the step-up in basis sounds bad. But gifting can still be the right strategy in two situations:
- Your estate significantly exceeds the $15M/$30M exemption. The estate tax (40% on the excess) can easily outweigh the capital gains savings from step-up. A $40M estate with $10M in appreciated stock might generate more total wealth by gifting the stock now — removing it from the taxable estate — even though heirs lose the step-up.
- The asset is expected to grow dramatically. GRATs and IDGTs are designed to move future appreciation out of the estate at low gift-tax cost. You retain the original FMV in the estate (and the potential step-up on that amount) while transferring the upside to heirs gift-tax free.
Strategies that preserve (or partially preserve) step-up
- Hold appreciating assets until death. Simple but effective if your estate is under the exemption.
- IDGT (Intentionally Defective Grantor Trust). Assets inside an IDGT are removed from the estate but — because the trust is "defective" for income tax purposes — they may still qualify for step-up at the grantor's death in some structures. Requires careful drafting.
- SLAT with retained asset mix. A SLAT transfers some assets outside the estate. You can structure which assets go into the SLAT (pre-IPO equity, rapidly appreciating real estate) and which stay in the estate to capture step-up (lower-growth, high-basis assets).
- Dynasty trust. Assets transferred to a dynasty trust lose step-up for the grantor's estate. But they're sheltered from estate tax at each subsequent generation's death — often the better long-run trade for multi-generational planning.
- Charitable giving. A CRUT or CLAT can convert appreciated assets to income streams and charitable legacy without immediate capital gains recognition — a third path that sidesteps the step-up vs. estate tax trade-off.
Assets where step-up matters most
| Asset type | Typical basis situation | Step-up impact |
|---|---|---|
| Closely held business | Low basis (built over decades) | Very high — step-up can eliminate millions in cap gains |
| Appreciated real estate | Often low after decades of ownership | High — especially rental property with prior depreciation recapture exposure |
| Brokerage portfolio | Mixed — some positions low basis, some high | Moderate — can selectively retain low-basis positions for step-up |
| Pre-IPO equity / RSUs | Very low (strike price or $0) | Potentially enormous — but liquidity often forces earlier transfer |
| Cash / equivalents | Basis = FMV (no gain) | None — step-up irrelevant for cash |
Practical implication: When designing your estate plan, keep your highest-appreciation, lowest-basis assets in your estate if you're below the exemption. Gift or trust-transfer your highest-growth-potential assets (where future appreciation matters more than current step-up) if you're above the exemption.
Related tools and guides
- Estate Tax Exposure Calculator — project total federal + state estate tax
- SLAT vs GRAT Comparison Calculator — compare two common lifetime transfer strategies
- Annual Gift Tax Exclusion Calculator — annual exclusion gifting ($19K/$38K per recipient) and 10-year estate impact
- Complete Estate Planning Guide for HNW Families
Talk through your step-up basis trade-off with a specialist
The right answer depends on your estate size, asset composition, growth expectations, and heir tax situation. A fee-only estate planning specialist can model your exact numbers. Free match.
Sources
- IRC § 1014 — Basis of property acquired from a decedent (Cornell LII)
- IRS Topic No. 409 — Capital Gains and Losses (2026 rates)
- IRS — Questions and Answers on the Net Investment Income Tax (§ 1411, 3.8% NIIT threshold $200K/$250K)
- Tax Foundation — 2026 Tax Brackets and Federal Income Tax Rates
Tax values verified as of April 2026. Federal estate tax rate 40% per IRC § 2001; $15M per-person exemption per OBBBA (July 2025). 2026 LTCG thresholds: single 20% above $533,400; MFJ 20% above $613,700. NIIT 3.8% per IRC § 1411 on MAGI above $200K/$250K (not indexed to inflation).